Do Banks Satisfy the Modigliani-Miller Theorem?
Aboura, Sofiane; Lépinette, Emmanuel (2015), Do Banks Satisfy the Modigliani-Miller Theorem?, Economics Bulletin, 35, 2, p. 924-935
TypeArticle accepté pour publication ou publié
Journal nameEconomics Bulletin
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Abstract (EN)The capital structure of banks has become the focus of an extended debate among policymakers, regulators and academics. The seminal Modigliani-Miller (1958) theorem is seen as supportive of regulators' drive to require higher equity capital to banks. This raises the question on to what extent does Modigliani-Miller theorem hold for banks. This article brings a new insight of the Modigliani-Miller theorem by considering the implicit government guarantee offered to banks. Our theorem shows that a bank does not satisfy the Modigliani-Miller theorem. The main result indicates that banks will favor leverage instead of equity.
Subjects / KeywordsModigliani-Miller; Leverage; Banks; Regulation
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